Research Activities: Does Speculation with Agricultural Commodity Futures Cause Price Bubbles in the Event of Negative Production Shocks?

IEE research fellow and MADM coordinator Tobias Thürer shares the key results of his PhD thesis which is about to be published in the coming weeks.

The study investigates whether speculative activities on agricultural commodity futures markets accelerate price increases in the light of production shocks. The motivation for this assessment is straight forward. Since the mid-2000s, an increasing financialisation of commodity futures markets took place. This development has fueled an ongoing discussion about the effect of investments in this market segment on the development of commodity prices. Against this background, the trading activities of financial speculators come to the foreground. Some commentators accuse these actors of causing price bubbles in agricultural commodities, which constitute a considerable threat to food security in developing countries. Thus, the validation of this accusation against speculative activities is highly relevant for these countries. This relevance is reinforced by the fact that climate change has brought on and continues to bring an increased frequency and severity of agricultural production shortfalls on a global level. Such production shocks reduce total supply and evoke price increases of agricultural commodities. Therefore, the question emerges whether speculative activities aggravate these price increases, intensifying the threat to food security. If so, the political agenda should not be confined to the adaptation to climate change, but should also address speculative activities on agricultural commodity markets.
In this study it is analysed whether speculative bubbles can be identified in the event of severe global production shocks. For this, he has developed a framework for tracing the transmission of the futures prices' development on the spot market. Using annual data on maize production and prices from the years 1979-2012, he analyses whether considerable price bubbles occurred during this period in the presence of global production shortfalls. In this study, no empirical evidence for such price bubbles could be found. This is an encouraging result as it indicates that it is sufficient for the global community to focus on the adaptation to climate change, rather than concerning itself with speculative activities in this market.

Dr. Tobias Thürer
Coordinator Master in Development Management
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